Andean Group - December 2007 (ISSN 1741 4466)

President Alan Garcí­a has taken an unusual foray into journalism over the last month to try and explain the reasons behind Peru's development problems and how these might be overcome. His first opinion piece, written in the national daily El Comercio was entitled "The Dog and the Manger" and was based on the Aesop's fable in which a dog lying in a manger of hay prevents the oxen from eating the hay. Garcí­a explained that the moral of the fable - do not begrudge others what you cannot enjoy yourself - was relevant to Peru because the country's development was constantly thwarted by officials at every level erecting ideological and bureaucratic barriers. Garcí­a followed up on this piece with another editorial, laying out his plans for a new State to solve Peru's problems.

Garcí­a said he derived so much gratification from the debate triggered by his first article in late October that he felt he had to describe the way to address the problem in a second piece, published a month later. Garcí­a argues that the best way for Peru to achieve its enormous potential for growth is to adopt a six-part plan to create "a new State".

The main thrust of his somewhat convoluted article is that Peru is rich in resources which it is not adequately exploiting. The way around this, he believes, is to strip the state of its complete control; provide public sector employees with incentives to work more efficiently; and to create new methods to attract investment.

It is a dramatic departure from the ideological beliefs he espoused during his first (failed) administration in the second half of the 1980s. Essentially, he is advocating neoliberalism by another name in order to avoid all of the negative connotations that encumber the term.

In many respects it is a domestic version of his "Pacific Arc" international integration plan which he outlined in September during the Apec summit in Sydney [RA-07-11]. This proposed an alliance between Peru, Chile, Mexico, Canada and Panama to strengthen ties with Asia. Each country subscribed to the common belief that the creation of a "modern social model" required free trade and investment to redress social inequalities.

Reducing state control

The first idea Garcí­a develops is the need to trim the power of central, regional and municipal government. He argues that state control at each level should be no more than supervisory. He uses the metaphor of customs at an airport: only some cases, chosen at random, should be taken aside and looked at because there is insufficient time to look at them all.

Garcí­a spends some time discussing the problems with the national system of public investment (SNIP). He says that like the dog in the manger, humans feel a need to exercise their power. This results in needless red tape and bureaucracy, causing less investment and more delay. His proposed way of circumventing this is to create new legislation limiting analysis of investment projects to just three months. "If a bureaucrat wants to exert control, he will need to work harder and faster," Garcí­a concludes exultantly.

Garcí­a advocates that the SNIP should be evaluated by non-state actors, such as universities and research institutes. He also calls for performance-linked pay in the public sector. Only by replicating the work ethos of the private sector, he says, can you hope to provide the incentives for public employees to meet targets.

The main problem with the idea of cutting through layers of bureaucracy to relax the rules on investment is that it risks attracting low-quality investment that may ultimately prove counter-productive. The economist Epifanio Baca, of the umbrella group of NGOs Propuesta Ciudadana, which advocates decentralisation and improved transparency to strengthen democracy, launched a savage critique of Garcí­a's plan in the national daily La República (see sidebar). He argued that it might suffice for a NS$5m-NS$10m (US$1.65-US$3.3m) project, but more time would be required to assess the quality of the investment for projects worth NS$50m-NS$100m.

Mining

Garcí­a also argues that the state is failing to capitalise on the country's rich resources. He proposes solutions such as using idle land to boost agricultural production; dividing forests into large sections to encourage modern logging companies to invest in these areas, combating illegal logging; and cultivating the 2m hectares of restingas (coastal forests) for rice production.

His big plan, however, involves mining. He advocates a reduction in profitability tax on businessmen who reinvest in metalurgy or mining. This looks like a desperate bid to reach the government's target of attracting investment worth US$10bn in the mining sector by 2011 (see sidebar). Baca argues, with some justfication, that businessmen should need little incentive to invest in mining given the current high price of natural resources.

Over and above this, Garcí­a neglects to consider the conflicts over mining projects. Peruvians are not united in their belief that Garcí­a's mining proposals under his "modern social model" are a good thing. Three districts in northern Peru held unofficial referenda on the proposed Rí­o Blanco de Majaz copper mine concession in northern Peru in September. It was the first time that environmentalists and international NGOs had tried to organise a referendum to prevent a project [RA-07-10]. The referendum resonated at a national level because it challenged Garcí­a's mining-development policy.

Turnout for the referendum was impressive: some 60% of the 31,000 people on the electoral register in Ayabaca, Pacaipampa and Carmen de la Frontera, in the region of Piura, went to the polls. Significantly, 95% of them voted "no" to the question "Do you agree with mining activity in your district?" The ombudsman, Beatriz Merino, said the votes were constitutional but non-binding, adding that the result "would enrich the state's decision on the matter". Garcí­a simply ignored the referendum, on the grounds that "Communist sectors" had influenced local inhabitants and were clearly "conspiring to stop the country from growing".

Baca contends that if Garcí­a manages to impose his proposal to shorten the analysis of investment projects to just three months, it could prove to be damaging for the country's environment. He argues that the state has not been fulfilling its commitment to conduct adequate environment impact assessments under the existing arrangements, and that this would be further compromised. He agrees that Peru has an obligation to harness its natural resources to reach its development goals, especially regarding mineral wealth, but that this should not be at any cost.

Mixed reaction

Unsurprisingly, Garcí­a's proposals got a big thumbs-up from the business sector. Jaime Cáceres, the president of the national business federation, Confiep, appealed to anyone interested in Peru's development to support the proposals. Others were less enthusiastic. "Garcí­a has taken off his mask," a senior legislator for the opposition Partido Nacionalista Peruano, Daniel Abugattás, commented. "The presidential thought betrays something of fujimorismo".

• Criticism

The economist, Epifanio Baca, described President Alan Garcí­a's plan for a new State as "a simple, hurried and demagogic way of confronting (Peru's) problems". He said it had no substance and was "doomed to fail". His main criticism was aimed at the central idea behind the proposals: that the markets and private investment can provide a solution to all Peru's problems. He said Garcí­a put far too much faith in private enterprise.

• Mining investment

Between 2002 and 2006, Peru received US$3.9bn in foreign investment in its mining industry. US$11bn has been invested in the past 15 years. Mining companies, according to official figures, made US$7.9bn in profits from their operations in Peru in 2006 and paid taxes of US$2.9bn.